The Supreme Court dismissed appeals by ECL Finance Ltd. and IDBI Trusteeship Services Ltd. against the NCLAT order excluding them from the Committee of Creditors of Palm Developers Pvt. Ltd. as "related parties" under Section 5(24)(m)(i) of the Insolvency and Bankruptcy Code. The Court held that ECL's contractual architecture - spanning the Articles of Association, Debenture Trust Deed, and Facility Agreement - conferred all-pervasive control over the corporate debtor's policy decisions, amounting to participation in policy-making processes. The subsequent assignment of debt to a second appellant after CIRP commencement was found mala fide and ineffective to circumvent the related-party prohibition.
Background & Facts
The Dispute
The appeals arose from the Corporate Insolvency Resolution Process of Palm Developers Private Limited (CD), which acted as guarantor for Saha Infratech Private Limited (SIPL). Two financial creditors - ECL Finance Ltd. (ECL) as debenture holder and term lender, and IDBI Trusteeship Services Ltd. (ITSL) as debenture trustee - claimed inclusion in the Committee of Creditors (CoC). A homebuyer objected, asserting both were "related parties" of the CD under Section 5(24)(m)(i) of the IBC and thus barred from CoC participation under the first proviso to Section 21(2). The NCLT and NCLAT upheld the objection. The Supreme Court examined whether the contractual framework established participation in the CD's policy-making processes.
Key Facts
- Debenture Trust Deed (13.05.2016): SIPL issued non-convertible debentures of face value Rs. 1 Crore each for Rs. 160 Crores in two tranches (110 + 50 debentures). Only the first tranche of Rs. 110 Crores was subscribed, entirely held by ECL. ITSL appointed as debenture trustee (18.05.2016).
- Security Package: CD provided unconditional corporate guarantee, first charge/mortgage over "Project Encore" (Greater Noida), hypothecation of project receivables, and escrow account for project revenue.
- Facility Agreement (22.09.2017): ECL sanctioned Rs. 90 Crores revolving credit to SIPL with CD as Obligor No. 5 (Guarantor). CD furnished corporate guarantee and share pledge.
- Dual Role of ECL: Debenture holder of SIPL (secured by CD's guarantee) and direct term lender to SIPL (guaranteed by CD).
- CIRP Commencement: Section 7 petition admitted on 27.01.2020.
- Claims Filed: ITSL claimed Rs. 131,17,23,044 (as on 29.02.2020) as debenture trustee; ECL claimed Rs. 139,02,83,168.68 under the Facility Agreement.
- Homebuyer Objection: An individual homebuyer (not through the Authorised Representative) objected to inclusion of both appellants in CoC as related parties.
Procedural History
- 27.01.2020: CIRP of CD commenced via Section 7 admission.
- 10.02.2020: ITSL and ECL submitted claims to IRP/RP.
- NCLT Proceedings: Homebuyer objected to claims. NCLT found no financial debt incurred by CD (no direct disbursal) and held both appellants as related parties under Section 5(24)(m)(i). Accepted homebuyer's locus.
- NCLAT Appeal: NCLAT affirmed NCLT. Distinguished Anuj Jain v. Axis Bank (Jaypee) on facts. Relied on Arcelor Mittal v. Satish Kumar Gupta for "control" test. Upheld homebuyer's locus citing Aashray Social Welfare Society v. Saha Infratech.
- Supreme Court Appeals: Civil Appeal No. 6268/2022 (by ITSL and ECL) and Civil Appeal No. 6273/2022. Contempt Petitions 730/2023 and 731/2023 filed subsequently.
- 27.10.2026: Judgment pronounced.
Parties' Positions
Appellants (ECL/ITSL): Contended that corporate guarantee constitutes financial debt under Section 5(8) regardless of invocation pre-CIRP, relying on China Development Bank v. Doha Bank. Argued Anuj Jain supports guarantee liability as financial debt. Denied "related party" status; submitted contractual rights were protective, not participatory.
Respondent (Homebuyer/Abhinav Mukherjee): Argued contractual provisions - AoA Clause 7.1, Debenture Trust Deed amendment, Facility Agreement special conditions - conferred positive control over CD's policy decisions. Cited Arcelor Mittal for proactive control test. Contended post-CIRP assignment to second appellant was mala fide per Phoenix ARC v. Spade Financial and ILC Report 2020.
Relief Sought
Appellants sought: (1) Setting aside NCLAT order; (2) Inclusion in CoC as financial creditors; (3) Recognition of claims of Rs. 131.17 Crores (ITSL) and Rs. 139.03 Crores (ECL); (4) Participation and voting rights in CoC meetings.
The Legal Issue
The central questions were: (1) Whether a corporate guarantee constitutes "financial debt" under Section 5(8) IBC without prior invocation before CIRP commencement; (2) Whether the debenture holder and debenture trustee qualify as "related parties" under Section 5(24)(m)(i) by virtue of "participation in policy-making processes" of the corporate debtor; (3) Whether the threshold for "participation in policy-making" under Section 5(24)(m)(i) is lower than "control" under Section 29A(c)/(g); (4) Whether a post-CIRP assignment of debt by a related party can circumvent the first proviso to Section 21(2).
Arguments Presented
For the Appellant
Senior Counsel Gaurav Mitra argued that Section 5(8) explicitly includes liability under guarantee as financial debt, citing China Development Bank where the Court held default is not a prerequisite for financial debt. The guarantee obligation crystallises upon CIRP commencement. Anuj Jain (para 46) recognised guarantee liability as financial debt. The NCLAT erred in requiring pre-CIRP invocation. On related-party status, appellants contended their rights were negative/protective (security enforcement), not positive policy participation. The nominee director right under AoA Clause 7.1 triggers only on default - a reactive power. Budget approval under Debenture Trust Deed amendment was mutual, not unilateral. The assignment to the second appellant was a legitimate commercial transaction.
For the Respondent
Senior Counsel Jayant Mehta and Arijit Prasad submitted that the contractual matrix demonstrates pervasive policy control. AoA Clause 7.1 grants nominee director appointment on default and final decision-making in deadlocks - a navigation role. The 16.01.2017 Debenture Trust Deed amendment empowers the Debenture Trustee/Monitoring Agent to approve quarterly construction budgets, directly steering project execution. Facility Agreement special conditions: nominee director on Board (insulated from liability), observer receiving all board notices, control over key managerial personnel appointments, right to appoint real estate agents via Sanction Letter Clause 21, and Power of Attorney with sweeping project management powers. Clause 4.1 AoA places project revenues in ECL's direct control. This constitutes "participation in policy-making" under Section 5(24)(m)(i). The assignment post-CIRP fails the Phoenix ARC bona fide test and ILC Report safeguards. Forensic audit confirmed fraudulent diversion of funds through CD.
The Court's Analysis
The Court first affirmed that corporate guarantee constitutes financial debt under Section 5(8) without requiring pre-CIRP invocation, endorsing China Development Bank. Section 5(7) makes any person to whom financial debt is owed a financial creditor; default under Section 3(12) is relevant only for Section 7 initiation. The NCLAT erred in requiring guarantee invocation.
On the pivotal issue - related-party status under Section 5(24)(m)(i) - the Court distinguished the "control" test under Section 29A(c)/(g) (Arcelor Mittal) from "participation in policy-making processes" under Section 5(24)(m)(i). Arcelor Mittal required proactive, positive control - the power to drive management/policy decisions ("driving seat" metaphor). Section 5(24)(m)(i) demands a lesser rigour: association by way of participation in policy-making, where a "role of navigation would suffice, in determining policy and channelising business interests."
Applying this standard, the Court examined the contractual architecture:
"Clause 7.1 of the AoA... the Debenture Holders and/or the lenders shall upon occurrence of an event of default have the right to appoint a nominee director on the Board of the Company... in the event there is a deadlock on any matter/decision at a board meeting and/or at a shareholders meeting amongst the directors or the Promoters, such matter/decision shall be referred to the nominee director of the Debenture Holder and/or the lenders and/or to the Debenture Holders or the lenders for final decision. Any decision by such director... shall be final and binding on the Promoters of the Company."
"The Debenture Trustee/Monitoring Agent may approve the Quarterly Construction Budget or may advise the Issuer and/or Security Providers to make modification as mutually decided... The Quarterly Construction Budget once approved by the Debenture Trustee/Monitoring Agent... shall be applicable... the amount from the Escrow Account to meet the construction cost shall during such quarter will be released as per the Approved Quarterly Construction Budget."
The Facility Agreement conferred: nominee director on Board (member of all Board committees), observer receiving all notices/agendas, veto over removal of key managerial personnel, right to appoint technical/financial/executive staff, right to appoint inspectors/auditors at borrower's cost, power to appoint real estate agents (Sanction Letter Clause 21), and Power of Attorney covering statutory approvals, raw material supply, labour, construction, purchaser communication, sale finalisation, and escrow retention.
The Court concluded: "From the above, it is crystal clear that ECL has an all-pervasive control, insofar as the projects of the principal Borrower are concerned... The AoA of the CD, a Guarantor, also indicated such control being exercised by the debenture holder/lender on its management and it cannot be said to be a mere restrictive or negative control exercised."
Since ECL (sole debenture holder) is a related party, it is disabled from CoC participation under first proviso to Section 21(2). ITSL, as trustee protecting ECL's interest, is equally disabled. The post-CIRP assignment to the second appellant was "not 'long ago' and is very recent... intended to defeat the rigour of the proviso to Section 21(2)" and failed the Phoenix ARC bona fide test. Forensic audit findings of fraudulent fund diversion and the "Meghdutam Encore" project initiated to defraud homebuyers reinforced this conclusion.
The Verdict
The Supreme Court dismissed both Civil Appeals (Nos. 6268/2022 and 6273/2022) and closed the Contempt Petitions (Nos. 730/2023 and 731/2023). The NCLAT order dated 2023 (affirming NCLT) was upheld. ECL Finance Ltd. and IDBI Trusteeship Services Ltd. remain excluded from the Committee of Creditors of Palm Developers Pvt. Ltd. as related parties under Section 5(24)(m)(i) read with first proviso to Section 21(2) IBC. The assignment of Facility Agreement rights to the second appellant was declared ineffective for CoC participation. Pending applications, if any, stand rejected.
What This Means For Similar Cases
Participation in Policy-Making Is a Lower Threshold Than Control
The Court decisively separated the Section 5(24)(m)(i) standard from the Section 29A "control" test. Practitioners must recognise that negative/protective rights can cumulatively amount to policy-making participation even without "driving seat" control. A "navigation role" - influencing policy direction and business channeling - suffices. This expands the related-party net for financial creditors with extensive contractual governance rights.
Contractual Architecture Will Be Scrutinised Holistically
- Articles of Association: Nominee director rights with deadlock-breaking authority (AoA Clause 7.1) are strong indicators.
- Debenture Trust Deed/Monitoring Provisions: Budget approval powers (quarterly construction budgets, escrow release control) constitute direct policy implementation.
- Facility Agreements: Nominee directors on Board/committees, observer rights, key personnel veto, inspection/audit rights, and broad Powers of Attorney collectively demonstrate pervasive supervision.
- Revenue Control: Direct control over project receivables/escrow accounts (AoA Clause 4.1) is determinative.
Post-CIRP Assignments by Related Parties Face Strict Scrutiny
- Assignments after CIRP commencement are presumed mala fide unless proven "long ago" and bona fide.
- Phoenix ARC and ILC Report 2020 require RP verification that assignee is not a related party.
- Forensic audit evidence of fund diversion or fraudulent project structuring will weigh heavily against the assignment.
- Assignees of related-party creditors will be treated "akin to a related party-financial creditor" under first proviso to Section 21(2) if bad faith is established.
Actionable Takeaways for Practitioners:
- Audit loan documents for policy-influence clauses (nominee directors, budget approvals, revenue controls, deadlock mechanisms) when advising creditors on CoC eligibility.
- Structure security packages to minimise governance rights if CoC participation is critical.
- Challenge related-party inclusions early by mapping contractual rights to "policy-making participation" - not just "control".
- Scrutinise post-CIRP debt assignments for timing, consideration, and connection to promoter groups.
- Leverage individual creditor locus (per Aashray Social Welfare) to object to related-party inclusions even without AR backing.
